George Papandreou was scrambling to form a new government on Thursday in a last-ditch attempt to convince Greece, and its creditors, that he is capable of handling the country's worst crisis in modern times.

As the prime minister appealed to members of the governing Socialist party to back austerity measures seen as the only way of staving off Greece's economic collapse, opponents of the cuts, which would skim €28bn (£25bn) from the budget by 2015, remained defiant.

Papandreou offered to step down on Wednesday to make way for a coalition that would back the reforms, before conceding that the unity talks had collapsed.

But most Greeks are far from persuaded that a cabinet reshuffle, no matter how extensive, will be enough to pull the nation back from the precipice.

The mood was sceptical as calm returned to the streets of Athens, the smell of teargas still hanging in the air following Wednesday's clashes between protestors and riot police.

"Only dictators would take the measures that this government wants to pass, not elected MPs," said Eleni Papadopoulou outside Athens' polytechnic, where a student uprising sparked events that led to the collapse of military rule in 1974.

"This government doesn't have the mandate to pass such barbaric policies. And we won't let them." A lawyer who turned 60 this year, Papadopoulou embodies the Greek spirit of resistance.

Eighteen months after the debt crisis erupted, Greeks sense that their country is in the grip of something new, that the drama engulfing them no longer bears only the hallmarks of a financial crisis, but of a political crisis too.

As workmen scrubbed graffiti from the facades of luxury hotels in Syntagma Square, the site of the Greek parliament and focal point of protests for the past month, and labourers started to replace the shattered marble surfaces of buildings and boulevards, the common refrain was that the crisis was far from over.

"What we are seeing are the actions of a dying man. A new government with old faces won't solve anything," said Thomas Slamaris, the owner of a chain of home furnishing stores before he was forced to declare bankruptcy this month.

"Papandreou has in essence accepted defeat. He has conceded that he is unable to pass policies that are simply unbearable for the average Greek," added Slamaris, who, like tens of thousands of people, has religiously come to the square to protest against the new austerity package, demanded in return for more aid, every day since 22 May.

"He reminds me of a tape recorder. Whatever they [the EU and IMF] tell him, he repeats word for word. The debt that has piled up is a product of fraud. It has nothing to do with the little man in the street which is why we want a referendum on the memorandum [outlining the conditions Greece agreed to in exchange for bailed out last May]."

Seated beneath a plastic awning erected across the road from the Athens parliament, a megaphone in hand, the former shopkeeper now spends his days exhorting Greeks to sign a petition pressing for a plebiscite to be held on the measures.

"We have collected 100,000 signatures so far and have sent a letter to the president of the EU commission, José Manuel Barroso, explaining that the government doesn't have the popular will to pass such measures," he said.

Pensioner Costas Margounis said he foresaw the crisis deepening because Greeks felt cheated and deceived. "In all these years nobody ever talked about the debt problem. Then suddenly we are faced with a stark dilemma: food or interest? Pay off the debt, or continue to live? Well, what would you choose?" he asked.

"The cuts we have endured have brought us to our knees. New measures would kill us."